BY SCOTT KIRSNER
Illustration by Greg Mably
COMING ATTRACTIONS: New equipment is delivering content from
your computer to your TV, bridging the so-called "last 10 feet."
Taking the stage at San Francisco’s convention center three years ago, Apple Chief Executive Steve Jobs unveiled two new products: one that would digitally deliver movies and TV shows from the Internet to the living room television set, and one intended to expand the boundaries of what a mobile phone could do.
Apple has since sold more than 40 million iPhones worldwide, and as few as one million of its silver, square Apple TV set-top boxes, according to one analyst’s estimate (though Apple has never revealed numbers on the latter product).
Apple’s foray into the living room shows just how tough it is for a new technology to find a place in America’s media cabinets. Others seeking new ways to get digital entertainment content onto the television screen have tried and failed, too, including Disney’s MovieBeam, the Vudu “movie appliance,” and the Akimbo VOD box, which was launched back in 2004.
The goal has been to execute an end run around traditional broadcast and cable delivery, and develop a new pathway to provide content to viewers, whether it’s an Internet connection plugged directly into the television; a dedicated set-top box that connects to both the Internet and the TV; or a hybrid device that bridges the Internet and TV and can perform other functions, such as playing Blu-ray discs or video games. So is this new way of reaching consumers a game changer for studios and media companies, and does it represent a revenue stream that could offset declining DVD revenues? Possibly, but not just yet.
“Today the video distribution landscape is dominated by cable, satellite, and telcos,” says Will Richmond, president of the market research firm Broadband Directions. “Ninety percent of American homes subscribe to one of those three services, which makes it hard for these stand-alone set-top boxes…to break in.” Consumers, Richmond says, may simply feel that their existing cable company offers a broad enough array of content choices, or they may be put off by the cost and complexity of buying yet another device or a new television.
But the status quo hasn’t stopped start-up companies and major industry players like Microsoft, Wal-Mart, and Sony from trying to find new ways to deliver digital content directly to viewers, often with new pricing models. Their belief is that the TV, not a laptop or handheld device, is the optimal place to watch long-form content. And some expect greater interest in the new Internet-meets-TV systems that could be sparked by the mass extinction of the neighborhood video store.
“As more Blockbuster and Hollywood Videos close, consumers are going to look for recently released movies in new places,” says James McQuivey, an analyst with Forrester Research. The rising price of a cable or satellite subscription is also spurring consumers to consider purchasing these new devices. Still others, says McQuivey, are simply not satisfied with the movies available on their cable or satellite company’s video-on-demand service, or find it frustrating to use. “Did you ever try using your remote control to search for a particular actor? It’s not a great experience,” he says.
The latest wave of devices offers access to different collections of content, with different price points and restrictions. Apple TV is a $229 device based on a “pay-per-download model”: every time viewers want to rent or purchase a movie or TV show, they make a separate purchase decision (similar to buying a movie from cable’s video-on-demand menu). The content library is limited to titles available on Apple’s iTunes Store, and rental movies must be finished within 24 hours of when they are started, or else they vanish. “Those issues leave you with a really narrow audience of people,” says Richmond.
By contrast, Roku’s Internet-connected box starts at $79, and offers Netflix subscribers free access to a collection of about 17,000 movies and TV shows, which can be viewed without advertising interruptions. Pay-per-download content from Amazon—another 40,000 or so titles—can also be purchased on the Roku system, as can live broadcasts of all Major League Baseball games. And media companies large and small can develop their own channels that Roku will distribute, which can be supported by advertising, subscription charges, and, eventually, a la carte purchases.
According to the company, Roku has sold 500,000 devices so far, and expects to surpass a million this year. “Our audience is not your typical early adopter or gadget fan,” says Jim Funk, vice president of business development at Roku. “It’s people who are entertainment enthusiasts.” Most, he says, still subscribe to cable or satellite. Average viewing time on the device, when consumers use it, is over two hours. “People are watching whole movies and TV shows, as opposed to on the Web, where it’s a few minutes of video here and there,” Funk says.
Gaming systems like the Sony PlayStation 3 and Microsoft’s Xbox 360 have also been building their own libraries of movies and TV shows (some at resolutions up to 1080p, surpassing the 720p resolution of most other devices, including Roku). Microsoft’s Xbox Live store offers not just movies and TV shows from studios like Warner Bros. and Disney, but also games and music. The company says it contains more than 25,000 pieces of high- and standard-definition content. (Both the Microsoft and Sony gaming systems, as well as the Nintendo Wii, also offer access to Netflix’s vault of streaming content.) Blair Westlake, corporate vice president of Microsoft’s media and entertainment group, says that over the past three months, consumption of high-definition movie and TV content on the Xbox has more than doubled.
TiVo, the company that helped pioneer the concept of digitally recording your favorite shows (and helped put the VCR out to pasture), is introducing a new multifunctional box called TiVo Premium. Starting at $300, it can digitally record shows in HD, and also offers access to movie services from Netflix, Amazon, and Blockbuster.
Further evidence that the living room is poised to be a lively battleground for content delivery surfaced recently with reports that Google is working with partners including Intel, Sony, and Logitech to bring a Google TV experience into the home through a new generation of televisions and set-top boxes.
One of the more ambitious new entrants in the set-top box rodeo is Silicon Valley-based Sezmi Corp., which this year began selling a device intended to entirely replace TV service from a cable, satellite, or telco provider. Priced at $299, the Sezmi box can receive over-the-air digital TV transmissions of broadcast channels, as well as live cable programming and on-demand movies delivered over the Internet. (Sezmi’s movie content comes from studios including Sony Pictures, Universal, and the Roxio CinemaNow service.) It also contains a one-terabyte digital video recorder. Monthly subscriptions start at $4.99. “We’re very dedicated to value pricing, and making sure that consumers get a service that is simple and easy to set up,” says Sezmi founder Phil Wiser. Currently, the device is only available in the Los Angeles area.
“Young adults who grew up with the Internet have certain expectations about entertainment,” says Wiser, describing Sezmi’s target audience. “They are used to time-shifted viewing, and they’re used to interactive viewing. We think those two changes are going to drive the market.”
It remains an open question if any of these services could generate revenues for content owners and creators as sales of packaged DVDs decline. “It’s hard enough to get good figures about video-on-demand revenues from cable or satellite companies,” says Ted Hope, an independent producer based in New York. “Things like Xbox and Netflix’s streaming service are this unexplored territory.”
“One dynamic you had in the retail world was that you had the intention to buy one new-release DVD, but you came home with two or three older movies, too,” says Steve Nickerson, president of home entertainment at Summit Entertainment. “In this new digital environment, that kind of impulse buying may not happen as frequently.”
Some expect that the set-top box of the future won’t be a separate box at all, but an Internet-linked TV that offers access to a vast array of video-delivery services—some subscription-based, some priced a la carte, and some ad-supported, like television was in its mid-20th-century incarnation.
“If you walked around the Consumer Electronics Show this past January, you saw the TV manufacturers recognizing this desire to have TVs connected directly to the Internet,” Nickerson says. Companies like Sony, Samsung, and Panasonic were showing flat-screen TVs that can access online content via a wired Ethernet connection or a home Wi-Fi network.
According to a survey released in January by the market research firm iSuppli, 27.5 percent of consumers who bought a new TV connected it to the Internet in some fashion. Nearly 42 percent of the TVs had a built-in Internet link, with the remainder being connected by video game consoles, Blu-ray players, and various set-top boxes.
Last December, the market research firm The Diffusion Group predicted the death of all stand-alone Internet-connected set-top devices, including Roku, by 2014. Instead, they expect more consumers to purchase hybrid or multifunctional devices, like gaming consoles or Blu-ray players that also offer movies delivered over the Internet.
LG, Sony, and other manufacturers now sell Blu-ray players for about $200 that can be connected to the Internet via Wi-Fi or an Ethernet connection to access services like Netflix and other video content from the Web—some for a fee, and some for free from sites like YouTube.
Hope says that he is already using an Internet-connected Blu-ray player at home that gives him access to digitally delivered content from CinemaNow, YouTube, and Netflix.
“Personally, I do think that we will see a complete convergence of the Web and the TV,” says Eric Lemasters, vice president of digital at E1 Entertainment, an independent distributor in New York. “It won’t happen overnight, but it will happen.”